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Stock Options Paid Off for CEOs, But New Rules May Curb Use

February 27, 2007
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Chief executives at high-performing companies watched the value of their stock options shoot through the roof last year, according to a new study.

Indeed, the median value of unexercised options for CEOs at companies with total returns to shareholders (TRS) averaging 25 percent more than tripled last year, to $42.6 million, from $13.8 million in 2005, according to consulting firm Watson Wyatt, which conducted the study. Overall, the median value of unexercised stock options for all chief executives in the analysis increased 47 percent last year to $28 million. One hundred large, publicly traded companies participated in the analysis.

Ira Kay, global director of compensation consulting at Watson Wyatt, said he wasn’t surprised by the huge gains considering the strong stock market performance last year; only 14 of the 100 companies surveyed had negative TRS last year.

The study also noted a link between pay and performance. Lower-performing companies—or those with TRS averaging 7 percent—saw the median value of unexercised options rise just 5 percent from $19.7 million in 2005 to $20.6 million last year.

“This shows a clear link between pay and TRS, the key metric executives look at,” Kay says. “And it cuts both ways. I have a CEO client whose in-the-money stock options went down $30 million last year. He got around $8 million of cash compensation. He views it as a $22 million pay cut.”

With the new pay disclosure rules kicking in this year, Kay said he thinks more companies will move away from stock options to more “shareholder-friendly” restricted stock and performance shares. He also said many companies will eliminate or reduce severance packages, perquisites and supplemental executive retirement plans.

Filed by Jeff Nash of Financial Week, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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